How to choose the best student loan refinancing offer
Refinancing your student debt could save you cash. Here’s how to go about it right. (iStock)
Refinancing your student loans can come with a number of benefits—especially if you have a high balance (say, $10,000 or more). It can lower your monthly payment, reduce your interest rate and maybe even help you pay off your loan faster.
If you really want to save cash in the process, you’ll need to keep an eye on interest rates to time your refinance right. You will also need to shop around with various private lenders, as rates and terms can range widely from one company to the next.
Here’s what you need to know as you start the process.
How much can you save by refinancing your student loans?
Refinancing can save you significantly if you’re able to snag a lower interest rate than what’s currently on your loans. To understand just how much refinancing can save you, you’ll need a student loan refinancing calculator and a good idea of what rates you can qualify for. Fortunately, rate-shopping marketplaces like Credible make the process a little easier by allowing you to compare offers from multiple lenders at once.
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Remember that the higher your credit score, the better rates you’ll receive.
Let’s look at a real-life scenario:
Let’s say you have a $30,000 loan balance with an interest rate of 7 percent. You have 108 payments left on the loan, and you’re paying $375 per month.
If you’re able to qualify for a 5 percent interest rate instead, refinancing would lower your monthly payment by $30 and save you $3,204 over the course of the loan.
If you refinance into a longer-term loan, it could lower your monthly payment even more (though your lifetime savings would be less due to the added interest you would pay). Find out your rate now by inserting some simple information into Credible's free online tool.
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Pros and cons of student loan refinancing
Saving money is just one of the benefits you could enjoy by refinancing your student loans. When timed right, refinancing can also offer:
Lower payments
A faster payoff time (if you choose a shorter-term loan)
More cash in your pockets
Less paid in interest over time
A shorter track to debt-free living
“Another benefit of refinancing student loans is simplifying your financial life,” said Brian Walsh, a certified financial planner with SoFi. “I regularly see individuals with more than a dozen student loans with several providers. Multiple payments can add unnecessary complexity to your personal finances.”
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There are some downsides to refinancing, though. If you have federal loans, it can mean losing valuable benefits like income-based repayment plans, public service loan forgiveness and more. It could ding your credit score, too.
“Student loans tend to be some of the oldest debt individuals have, so refinancing could lower your average age of credit and introduce a new inquiry for the underwriting of the new loan,” Walsh said.
Is it the right time to refinance your student loans?
Refinancing your student debt isn’t always the right move. If you need a lower monthly payment or you know interest rates have dropped significantly, then it might be a smart time to refinance. But there are also factors to consider, too.
“I think the right time to refinance private student loans is any time you can adjust your repayment strategy to align with your goals,” Walsh said. “Most people only look at the interest rate, which is important, but it is also important to understand the goal of your student loan repayment strategy.”
Make sure you take into account the current economy, too. As a result of the CARES Act, federal student loan borrowers do not have to make payments until October 1, 2020. Refinancing any federal student loans now would disqualify you from these benefits.
“If you choose to refinance in the current climate, you give up your federal protections,” said David Green, chief product officer at student loan lender Earnest. “If you think you may end up in income-driven repayment at any point in the future, refinancing will not make sense for you. Refinancing a federal student loan with a private lender means you will no longer have access to benefits of your federal loans, including the temporary 0% interest rate on federally held loans, suspension of payments or any other relief measures implemented for federal loans to address the COVID-19 crisis.”
How to choose the best student loan refinance offer
The first step to choosing the right refinancing option is to understand your goal. If you’re aiming to lower your long-term costs, then the interest rates you’re offered is where you’ll want to focus. If you’re looking to pay off the loan as fast as possible, you’ll want the offer with the shortest loan term possible.
“At a high level, I see three common goals: reduce current payments, keep the payment the same while paying less interest and paying off debt as quickly as possible,” Walsh said. “Refinancing a private student loan right now could help accomplish all three of those goals, so I encourage borrowers to explore how refinancing would impact their payments and rates. Knowledge is power. Once you understand your options, you can decide if refinancing your private student loans aligns with your goals.”
Look at a number of lenders and don’t settle for the first one you contact. “It sounds simple but many individuals skip this step,” Walsh said. “Last weekend, I bought a new TV and spent hours comparing prices for different models on multiple sites. Refinancing your student loans has a much larger impact on your finances than purchasing a TV.”
Make sure you consider a good mix of lenders, too, including banks and credit unions. Tools like Credible can help streamline this process and make comparison-shopping easier.
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You should also take into account:
The type of loans you have. In order to refinance your loans, you’ll need to use a private lender. If you have federal student loans, that could mean losing key benefits. Make sure you won’t need to use these benefits later on.
Your eligibility for each refinancing option. What are the lender’s credit score and debt-to-income ratio requirements? What other standards will you be held to? “Generally, in order to get approved for refinancing, you’ll need to have your student loans in good standing, at least one month of normal expenses saved, proof of income, and little to no credit card debt,” Green said.
Type of interest rate. Are they fixed- or variable-rate options? Keep in mind that variable interest rate loans may have increased rates (and payments) later on down the line. Be sure the terms line up with your long-term goals.
Repayment terms. How many months does the loan last for? How long will you be paying interest and how long until you’re debt-free?